I think this news is very important to hear, especially if you’ve been on the fence about buying (or selling) right now and want or need to use an FHA loan. FHA loans have the lowest credit score requirement and lowest down payment requirement of only 3.5% down. Starting on April 1, 2013 two things will happen for new loans:
- PMI (Private Mortgage Insurance) rates will go up 0.10%, which equates to a higher monthly payment. ($100/year per $100k)
- PMI could last for the entirety of the loan instead of being automatically removed at 22% equity!
What does this mean to you? It means that not only are your payments going to be higher after 4/1/13, but you’ll likely pay PMI for the entire life of the loan. This could be 30 years!!! So the only way to be able to remove the PMI would be to refinance in a few years, but what are the chances the rates will be this low in a few years? So one way or another, you’ll be paying a lot more for a home if you use FHA after April. You’ll need to be applied for a loan no later than March 25th to avoid this increase.
To give you an example of how this increase might affect you, let’s say you have a $100,000 FHA loan at 3.5% interest. Your PMI payments might be under $1000 a year for a 30 year loan, that should be dropped off to $0 after about 8 years. Instead, you’ll be paying an extra $22,000 over the course of the loan. So let’s say you determine to refinance after 8 years and you have 80% equity in your home. Let’s say the rates are at 7% (or possibly higher) at that time. The amount you’re paying in interest on the life of your new loan goes up $50,000 PLUS you just paid 8 years of interest($22,000) and PMI($8,000).
To add salt to the wound, housing inventory is very low, so buyers are having a difficult time finding a home. It might be wise to consider buying or selling quickly.